In May of this year, the UK Supreme Court rejected the old “Cardozo Rule,” which held that, even if a contract contained an amendments-in-writing or waivers-in-writing clause, a party to the contract would still be free to claim that the writing requirement was orally waived and therefore an oral variation was enforceable.  The court’s holding might embolden contract drafters to choose English law to govern an amendments-in-writing or waivers-in-writing clause while expressly- or implicitly choosing a different law for the rest of the contract.
 Rock Advert. Ltd v MWB Bus. Exch. Ctrs. Ltd,  UKSC 24 (Sumpton, L.), disagreeing with Beatty v Guggenheim Exploration Co., 225 N.Y. 380, 387-88 (1919) (Cardozo, J.). Hat tip: Rachael Clements and Aimee Donaldson, No Oral Modification Clauses – Firmly Set In Stone (Sept. 27, 2018).
Table of contents
- The old Cardozo Rule: “No oral modification” clauses don’t count
- The UK Supreme Court rejects the Cardozo Rule
- So: Choose English law to govern no-oral-variations clauses?
- What grounds might exist for disregarding such a choice of law?
- Proving oral waiver of the choice of English law could be tricky
- Question to readers: What other contract clauses might benefit?
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The old Cardozo Rule: “No oral modification” clauses don’t count
Courts have sometimes held that at common law, parties are free to orally amend or waive a contract provision (subject to any applicable requirements of the Statute of Frauds), even if the contract expressly states that all amendments and waivers must be in writing. Courts sometimes quote something that then-Judge (later Justice) Cardozo said in a 1919 New York case:
Those who make a contract, may unmake it. The clause which forbids a change may be changed like any other. The prohibition of oral waiver may itself be [orally] waived. Every such agreement is ended by the new one which contradicts it … What is excluded by one act, is restored by another. You may put it out by the door, it is back through the window. Whenever two men contract, no limitation self-imposed can destroy their power to contract again.
(Some statutory provisions expressly validate no-oral-variation clauses; see the commentary to the Common Draft amendments-in-writing clause.)
The UK Supreme Court rejects the Cardozo Rule
In Rock Advertising, the UK Supreme Court quoted the Cardozo Rule in its survey of laws governing no-oral-variations clauses in contracts. Id. at ¶¶ 7-9. The court concluded, however, that “the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation.” Id. at ¶ 10 (emphasis added). Lord Sumpton branded as “a fallacy” the rationale that the importance of party autonomy precludes parties from “validly bind[ing] themselves as to the manner in which future changes in their legal relations are to be achieved”; he noted that:
- by entering into a contract in the first place, the parties are limiting their future autonomy to a certain extent; and
- “There are many cases in which a particular form of agreement is prescribed by statute …. There is no principled reason why the parties should not adopt the same principle by agreement.”
Id. at ¶ 11.
The judge explained why no-oral-variation clauses can make business sense:
There are at least three reasons for including such clauses.
The first is that it prevents attempts to undermine written agreements by informal means, a possibility which is open to abuse, for example in raising defences to summary judgment.
Secondly, in circumstances where oral discussions can easily give rise to misunderstandings and crossed purposes, it avoids disputes not just about whether a variation was intended but also about its exact terms.
Thirdly, a measure of formality in recording variations makes it easier for corporations to police internal rules restricting the authority to agree them.
These are all legitimate commercial reasons …. I make these points because the law of contract does not normally obstruct the legitimate intentions of businessmen [sic], except for overriding reasons of public policy. Yet there is no mischief in No Oral Modification clauses, nor do they frustrate or contravene any policy of the law.
Id. at ¶ 12 (emphasis and extra paragraphing added).
For additional commentary on the Rock Advertising case, see Glenn D. West, Cognitive Dissonance in the Common Law of Contracts: Oral Modifications to Written Agreements that Purport to Invalidate Oral Modifications (May 29, 2018).
So: Choose English law to govern no-oral-variations clauses?
A bold American contract drafter might want to try to take advantage of the Rock Advertising holding by using a targeted, single-clause choice of law, perhaps along the lines of the following language:
The parties expressly agree that this provision [OPTIONAL: but no other] is to be interpreted and applied in accordance with English law as announced in Rock Advert. Ltd v MWB Bus. Exch. Ctrs. Ltd,  UKSC 24.
After all: Choice-of-law clauses are widely used and readily enforced in the United States (unless the choice of law offends some public policy of the forum state), as discussed in the commentary to the Common Draft governing-law provision.
It might seem strange for a contract to specify different choices of law to govern different clauses of the contract. But conceptually this isn’t unheard of:
- In the 1988 update to the Restatement (Second) of Conflicts of Laws, comment i to § 187 states in part that “the parties may choose to have different issues involving their contract governed by the local law of different states.” The comment cites Kronovet v. Lipchin, 288 Md. 30, 415 A. 2d 1096 (1980), in which loan documents for a real-estate project adopted local Maryland law for interest- and usury issues but New York law for others.
- In its Akorn decision earlier this week, the Delaware chancery court observed: “Attentive readers will have noted that none of the parties to the Merger Agreement is a Delaware entity. … The parties nevertheless chose Delaware law to govern the Merger Agreement (excluding internal affairs matters governed by Louisiana law) and selected the courts of this state as their exclusive forum for litigation.” Akorn, Inc. v. Fresenius Kabi AG, No. 2018–0300–JTL, slip op. at 11 n.14 (Del. Ch. Ct. Oct. 1, 2018).
- The EU’s Rome I Regulation on contractual obligations states in Article 3.1 that “… By their choice the parties can select the law applicable to the whole or to part only of the contract.”
- An international contract might specify that it is to be governed by the laws of, say, Brazil, but that any arbitration is to be “seated” in England, which might well mean that the arbitration proceedings would be governed by English law. That was precisely the holding of an English court in Sulamerica CIA Nacional De Seguros SA & Ors v Enesa Engenharia SA & Ors,  EWCA Civ 638, discussed in Sherina Petit and Marion Edge, The governing law of the arbitration agreement Q&A, in Norton Rose Fulbright, Int’l Arbitr. Rpt. 2014 – issue 2. I also seem to remember seeing (but can’t lay my hands on) at least one contract that expressly specified one country’s law to govern the contract but another country’s law to govern arbitration proceedings.
- Domestic contracts often specify that the substantive law of a particular jurisdiction will apply — which implicitly leaves in place the procedural law of the forum state — or they might specify a jurisdiction to provide both substantive and procedural law, although a court might not honor a choice of procedural law. See generally (the extremely-useful) John F. Coyle, The Canons of Construction for Choice of Law Clauses, 92 Wash. L. Rev. 631, 648-55 (2017). When a contract requires that amendments and waivers be in writing, it likewise amounts to a choice of procedural rules.
What grounds might exist for disregarding such a choice of law?
A clause-specific choice of law is unlikely to work when the clause in question offends a public policy of the forum state. See the examples in the commentary to the Common Draft governing-law clause. As the Rock Advertising court notes, however, it’s not as though a no-oral-variation clause would offend public policy.
One more possible concern: What if neither the parties, nor the subject of the contract, had anything to do with England — would that dissuade a U.S. court from applying English law? Probably not: The parties’ joint desire for a neutral, well-established law such as that of New York, Delaware, or England would likely be honored as an “other reasonable basis for the parties’ choice.” Restatement (Second) of Conflicts of Laws, § 187(2)(a) (1971).
Compare the related subject of choice of forum, where the Supreme Court said:
Not surprisingly, foreign businessmen prefer, as do we, to have disputes resolved in their own courts, but if that choice is not available, then in a neutral forum with expertise in the subject matter. Plainly, the courts of England meet the standards of neutrality and long experience in admiralty litigation. The choice of that forum was made in an arm’s-length negotiation by experienced and sophisticated businessmen, and absent some compelling and countervailing reason it should be honored by the parties and enforced by the courts.”
The Bremen v. Zapata Off-Shore Co., 407 US 1, 11-12 (1972). Similar considerations would seem to favor allowing parties to choose a neutral, established law to govern their contract, even when they have no other connection to the jurisdiction of that law.
Proving oral waiver of the choice of English law could be tricky
Suppose that a contract chose English law for the amendments- and waivers-in-writing clauses. Even so, a contracting party, following Beatty, might still try to claim that the parties had orally agreed to amend or waive, not just the particular provision in dispute, and not just the writing requirement, but also the English choice of law. Imagine the opening statement at trial: Ladies and gentlemen of the jury, the landlord and my client, the tenant, orally agreed to three things: That the landlord would reduce the monthly rent; that the lease’s no-oral-modifications clause was waived; and the lease’s choice and the lease’s choice of English law for that requirement was also waived.” Many judges and jurors would rightly be skeptical of such an argument.
Question to readers: What other contract clauses might benefit?
I’d welcome any suggestions as to any other contract provisions that might benefit from a clause-specific choice of law.